Q1 2014 U.S. Banking Review: Assets Under Custody

The first quarter of the year was a mixed period for global custody banks. The low interest rate environment continued to put downward pressure on their revenues, while an overall improvement in the market valuation of debt and equity securities boosted their performance-related fees. The net impact of these two opposing factors kept custody banking revenues at levels similar to the previous quarter, even though the size of assets under custody for these banks saw a healthy growth over this period.

In this article, we focus on the assets under custody for the world’s four largest custody banks – Bank of New York Mellon, JPMorgan Chase, State Street and Citigroup – and how they have changed over the last two years. These custody banking giants are all based in the U.S. and together garner a roughly two-thirds share of the global custody industry. As a part of the article, we also detail some recent activity in the custody banking space as well as the outlook for total assets under custody at these banks for the rest of the year.

The table below summarizes the total assets under custody for each of the four biggest custody banks at the end of each quarter since the last quarter of 2011. The data has been compiled using figures reported by the individual banks as part of their quarterly announcements.

It should be noted that unlike the other three banks, BNY Mellon adds up the total size of its assets under custody and assets under administration, to report a single “assets under custody and administration” (AUC/A) figure each quarter. To facilitate a side-by-side comparison, we have assumed that BNY Mellon’s AUA value remained constant at a figure of $3.6 trillion over the period, and deducted this number from the reported figure to arrive at the bank’s AUC.

The graph below expands on this data to make it easier to study the trend in these banks’ AUC since early 2011.

Quite notably, the asset base for all these banks have largely moved in tandem over the period – something that can be understood by the fact that market-based revaluations affect assets under custody between quarters much more than net inflows or outflows for a period. Getting to the figures themselves, the jump in the asset base over the Q2 2013 – Q1 2014 period is evident, with the combined AUC for these four banks increasing by a little more than 10% over the period. This is a considerable change, given that the the average assets overseen by these banks is more than $20 trillion, and much of it can be attributed to appreciation in equity markets around the globe.

BNY Mellon maintains a strong grip on the industry, boasting a $3.3 trillion lead over second-ranked JPMorgan at the end of the first quarter. However, it should be remembered that BNY Mellon’s diversified geographical presence also makes its asset base more sensitive to currency fluctuations than its competitors – which is likely a reason for the gap shrinking over the last couple of quarters. JPMorgan and State Street have a near-identical custody asset base around $21 trillion, followed by Citigroup, which handles around $6 trillion less.

While none of the custody banks detail the proportion of the growth in AUC figures that come from actual inflows, currency movements and market value changes, State Street does provide a break down of the total AUC by products (i.e. mutual funds, collective funds, pension products and insurance & other products). Given the size of each of the custody banks’ portfolios, this information can be used to generalize quarterly changes across the industry. State Street’s data shows a marked improvement in assets from collective funds in Q1 followed by decent growth in mutual funds and insurance & other products. Assets in pension products fell by about 6.5% quarter-on-quarter.

For the rest of the year, we expect the primary driver of growth in these banks’ asset bases to be the expected rise in interest rates. Lower equity valuations from a price correction in the equity markets over the period should partially offset the gains. We expect the AUC figures for these four banks to end this year at a total of around $83 trillion – a 4.5% increase compared to the $79.4 trillion level at the end of 2013.

Also, the recently announced decision by Norway’s $866-billion sovereign wealth fund – the largest in the world – to switch to Citigroup from its current custody banking provider JPMorgan should result in the latter falling to the third position in this list this quarter. While Citigroup will easily report above $15.5 trillion in custody assets by the end of Q2 2014, State Street should surpass JPMorgan as a direct result of this deal.

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